Zeal Research: Gold’s strong season is just getting underway, with this metal’s summer-doldrums seasonal low in place. The past couple months’ stiff headwinds are starting to shift to fierce tailwinds, thanks to Asian demand ramping up heading into autumn. Gold’s pronounced seasonality is very important for all investors and speculators to understand, as today’s inflection point is a very bullish omen for this still-unloved asset.
Gold seasonality is somewhat counter-intuitive, with its mined supply essentially constant year-round. Once a company spends over a decade and many hundreds of millions of dollars to develop a gold deposit into an operating mine, its future production profile is essentially fixed. The gold supply is not like that of the soft commodities, where harvest floods the markets with a massive onslaught of new supplies.
But supply is only half the price equation, demand is equally important. And rather fascinatingly, global gold demand varies dramatically as each calendar year marches forward. There are specific times of the year where demand explodes and other times where it withers. Gold’s ironclad demand-driven seasonality is the product of well-understood income-cycle and cultural phenomena from all around the world.
And today we happen to be right at the great ebb of this perpetual seasonal cycle, the end of July. The summer is gold’s weakest season of the year, because there are no major recurring demand surges. But starting now, that changes dramatically. In the coming weeks Asians will once again start flooding into gold in droves, forcing its price higher. So buying today ahead of that near gold’s seasonal lows is very prudent.
Soon gold will start powering higher in its initial strong-season rally straddling late summer and early autumn. As gold rises, so will the entire precious-metals complex. The gold tracking ETFs, led by the mighty American GLD gold ETF, will mirror gold’s advance. And silver and the stocks of the precious-metals miners will leverage and amplify it. The dawn of gold’s strong season is always an exciting time.
So this week I decided to celebrate 2014’s major seasonal low by furthering my long-running studies on gold’s seasonality. This critical knowledge will greatly help if you invest in or speculate in anything precious-metals related. The methodology is simple and easy to understand. Every calendar year of gold’s secular bull since 2001 is individually indexed, and then each year’s indexes are averaged.
The results charted reveal gold’s seasonal tendencies over any calendar year. Limiting this study to gold’s secular bull is important because prices behave very differently in secular bulls and bears. And it is essential to index each year individually before averaging them to ensure percentage comparability. With gold averaging $311 in 2002 and $1409 in 2013, its raw unindexed prices just aren’t equivalent.
Every calendar year’s gold prices are indexed off the final trading day’s close of the previous year, which is set to 100. If gold is up 10% at any time during a year, its index will read 110. These indexed percentage moves are always perfectly comparable regardless of gold’s absolute price level. Every year’s since 2001 individual index is then averaged together, yielding this unique and indispensable gold-bull seasonality chart.
Gold has enjoyed a very strong seasonal uptrend since its secular bull was born in 2001. On average over that span, gold ended each year an amazing 13.4% higher! It’s just flabbergasting that gold is still so unloved by investors with such an awesome track record. That trounces the universally-adored S&P 500 stock index, which has gained a pitiful 1.9% annually at best over essentially the same secular timeframe.
The problem is traders’ short-term memories dangerously cloud their long-term perspectives. All anyone remembers is 2013, the most anomalous market year seen in our lifetimes after 2008’s stock panic. The Fed’s reckless jawboning and massive bond monetizations catapulted the S&P 500 29.6% higher. And that sucked vast amounts of capital out of alternative investments including gold, which plummeted by 27.9%.
But investing is about riding long-term trends, not betting crazy anomalies will magically last forever. And gold’s secular-bull seasonals reinforce how incredibly profitable it has been. Thanks to recurring gold demand surges that flare up around the world at various times of the calendar year, gold has enjoyed four major annual seasonal rallies on average. And since we’re in late summer today, that’s a great place to start.
Gold’s weak season runs from late May to late July, the time of the year devoid of regular surges in gold demand. I’ve long called these the summer doldrums. Gold tends to drift sideways to lower on balance in June and July, spawning a dark sentiment wasteland where everyone either forgets about gold entirely or starts to loathe it. Sound familiar? While gold bottoms seasonally in early July, it still languishes until late July.